Hedging Against Falling Lean Hogs Prices using Lean Hogs Futures

Lean Hogs Futures and Commodities

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Lean hog futures are critical hedging instruments for the pork industry and because of the volatility of hog prices. Trading in these futures often attract plenty of speculative positions. The lean hog is another term for pork that is traded on the options and futures exchanges of the Chicago Mercantile Exchange (CME).

Contract Specs

Some important characteristics of the lean hog futures contract are as follows:

• Ticker Symbol: LH
• Exchange: CME
• Trading Hours: 10:05 a.m. to 2:00 PM EST
• Contract Size: 40,000 pounds
• Contract Months: Feb, Apr, May, Jun, Jul, Aug, Oct, and Dec.
• Price Quote: price per pound
• Tick Size: $0.00025 or 2.5 cents per pound = $10.00 (0.00025 x 40,000 lbs).
• Last Trading Day: The tenth business day of the contract month

Fundamentals

Most hog production occurs in the Midwest. The largest hog producing states are Iowa, North Carolina, Minnesota, and Illinois. The U.S. is the world’s largest pork exporter. Typically, it takes six months to raise a pig from birth to slaughter. Hogs are generally ready for market or slaughter when they reach a weight near 250 pounds.

A market hog with a live weight of 250 pounds will typically yield 88.6 pounds of lean meat (Pork Facts 2001). This lean meat consists of an average of 21% ham, 20.3% loin, 13.9% belly, 3% spareribs, 7.3% Boston butt roast and blade steaks, and 10.3% picnic. The rest goes into jowl, lean trim, fat, and miscellaneous cuts and trimmings (USDA-AMS).

Pork bellies, which used to trade on the CME, are mainly used for bacon and can be frozen and stored for up to a year before processing. The contract was discontinued due to a lack of liquidity.

Seasonality tends to lead hog prices higher between May and July the heart of grilling season in the United States.

Corn and Hogs

The price of corn has a strong correlation with lean hog futures because hogs eat corn. If the price of corn rises substantially, farmers tend to take their hogs to market at lower weights (younger) to avoid high feed costs. At these times, lean hog futures prices tend to drop due to increased supplies.

One can estimate the future amount of hog production by monitoring the Hogs and Pigs Report. When the number of newborn pigs is lower than in previous quarters, it is likely that hog production will be lower in six months later when they are ready for market.

Reports

The Hogs and Pigs Report comes out quarterly. The hogs report presents data on the U.S. pig crop including inventory numbers and weights. The data highlights the current supplies and projected supplies for the future. The CME Lean Hog Index is a two-day weighted average of cash prices.

Developments Over Recent Years

Pork is a staple animal protein around the world. Over recent years, the hog futures market has experienced a great deal of price volatility.

In 2020, lean hog futures rose to all-time highs at over $1.33 per pound when porcine epidemic diarrhea or PED caused the death of over seven million suckling pigs, creating a pork shortage and caused the price of the animal protein to skyrocket. An effective immunization has prevented further outbreaks of PED. In 2020, the price of lean hog futures moved back to the 60 cents per pound level.

In 2020, the Chinese bought the largest U.S. hog processing company Smithfield Foods. While there was some opposition, the sale of the company was eventually approved by Congress, and now China controls an integral part of the U.S. and international pork market.

With over 1.3 billion people to feed, the purchase of Smithfield Foods is another example of China’s appetite for commodity resources around the globe. Pork is a vital animal protein and a staple in the diets of many people.

The world population has increased exponentially, and competition for food will continue to strain the fundamentals of lean hogs and other foods when supply shortages appear. Demographics are likely to cause new highs in many food markets during periods of tight supplies.

Lean Hogs Futures – Price & Chart

Current and historical prices, chart and data for the CME Lean Hogs Futures #1 (LN1) contract. Contracts use the following methodology to allow long term price comparisons:

• Front Month
• Calendar-Weighted Adjusted Prices
• Roll on First of Month
• Continuous Contract History

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Lean Hog Futures

Each year, 100 million hogs are brought to slaughter, a number only possible because of the movement to intensive, rather than traditional, pig farming. Because pork is one of the most widely consumed meats, the demand for pork is always strong and growing. Lean hog is the most common source for pork meat in the U.S., but the country that continuously ranks at the top for total consumption of pork is, without a doubt, China.

Lean Hog Facts

Hogs have a relatively short gestation period of about 3.5 months with the typical litter bearing 9 piglets. Therefore, hogs are bred twice a year continuously in order to ensure a constant wave of production. After about a month, the piglets are weaned from their mothers and fed a special diet to produce a quick weight gain. Hogs can gain up to 3 pounds every time they feed. When hogs are around 6 months old and reach a weight of over 250 pounds they are ready to be butchered. Each matured hog can yield around 190 lbs. of meat suitable for consumption.

China is responsible for nearly half of all pork production worldwide, however, the United States is the leader for pork exports. Japan was the world’s largest importer of pork in 2020.

Lean hog futures can allow traders to address price risk among those involved in the trade of lean hogs and to assess supply and demand of lean hogs for both the current and future outlook.

Last updated October 2020

Additional Info

Recent Posts on Lean Hogs

• Turner’s Take Podcast: 97 Million Acres of Corn! (3/31/2020) – New Crop looks bad. We estimate we lose another 150mm in demand from low energy prices in the 2020-21 marketing year. With 97 million acres and a trend line yield we see ending stocks blowing out to 3.4 billion. This puts cash prices and harvest lows under $3.
• Turner’s Take Podcast: Transitioning to Wide Ranging Consolidation (3/25/2020) – I am working from home while IL has a Stay at Home order in effect. My office cell is 312-651-4621. My office phone 312-706-7610 will roll over to my cell phone if you call my trade desk. This week we talk about the steps that took place so a potential bottom could be made. I think the market is now heading into a period of wide ranging consolidation. We talk about what to look for and why in the coming weeks for stocks, energy, livestock and grains. Make sure you take a listen to the latest Turner’s Take Podcast!
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